Wednesday, August 21, 2013

Incentives Matter: Why it's sometimes rational to choose not to work

Earlier this week, the Cato Institute released an excellent study looking at the size and effects of the numerous welfare programs in the United States. It's entitled "The Work Versus Welfare Tradeoff: 2013", and it's a great example of why Cato is ranked at the very top of the Think Tank ratings year in and year out. There have been many reports on this work both in the MSM and the blogosphere; one I particularly like is by Cato's very own Michael Tanner who, writing in the New York Post, asks you to imagine this scenario:

Here’s an offer for you: $38,004 per year, tax free.No work required.Apply at your local welfare office.

Many people would consider this an offer too good to pass up. (By way of comparison, business undergrads at my school typical land jobs starting in the low $40Ks). Tanner continues:

While that might not sound overly generous, remember that welfare
benefits aren’t taxed, while wages are. So someone in New York would
have to earn more than $21 per hour to be better off than they would be
on welfare.That’s more than the average statewide entry-level salary for
a teacher.

Plus, going to work means added costs such as paying
for child care, transportation and clothing.Not to mention that, even if
it’s not a money-loser, a person moving from welfare to work will see
some form of loss — namely, less time for leisure as opposed to work.

Herein lies the problem. When the government gets in the business of redistributing wealth, it ends up incentivizing the wrong behavior. Alas, for those in the situation described by Tanner, it makes sense to avoid working and to take government handouts. The government is, intentionally or not, punishing some for choosing work and rewarding others for avoiding it. So what is the solution? Read Tanner's article to find out.